William Chu

The Los Angeles Community Development Bank was a belated federal response to the 1992 Los Angeles riots. This isn’t just any federal assistance program. It’s the largest-ever federal funding commitment to a bank with a high-risk clientele. The bank has a double duty: making loans and creating jobs. The bank’s loans to struggling businesses are backed by the city’s future federal community-development block grants, which might be lost should the bank be unable to repay the federal government. So the city, as well as the federal government, has much at stake.

Six weeks ago, William H. Chu, 44, became the bank’s third chief executive officer in its turbulent four-year history. Chu is the first CEO with commercial lending experience--and therein lies one of the bank’s key problems. A Department of Housing and Urban Development audit last year laid out its troubled situation: a 32% default rate on loans, weak internal controls and little job creation.

Chu, a first-generation immigrant from Hong Kong, was picked from among more than 100 applicants for the position. It will be his job to shore up and expand the bank’s precarious lending portfolio, to strengthen controls and build confidence in the institution.

The bank’s short history has been problematic, to say the least. HUD provided $430 million for loans to businesses rejected by commercial lenders and to create jobs in some of the city’s poorest neighborhoods. But there were severe restrictions on who the bank could lend to. Each loan applicant had to have already been turned down for a regular bank loan, which meant each carried more than the average amount of risk. Moreover, the end of the long California recession meant businesses that would have been prime candidates for help were strong enough to get loans from regular commercial lenders or the Small Business Administration. That left the bank with only the riskiest prospects. For example, its biggest commitment to date was the financing of a South-Central dairy start-up, involving nearly one-fourth of the money the bank has loaned out. That business failed last year.

Chu brings to his post many years of banking experience, including work at Lippo Bank, United Pacific Bank and, most recently, East West Bank, where he was senior vice president and director of retail banking for one of the largest U.S. financial institutions focusing on the Chinese American community. His current task will be as difficult as any he has confronted before, and that has included starting a commercial-loan program from scratch.

The bank operates in the Los Angeles empowerment zone, which covers some 20 square miles and encompasses parts of East and South-Central Los Angeles as well as Pacoima, in the San Fernando Valley.

Chu lives in Downey with his wife, Agnes, and their two children, Jacqueline, 17, and Stephen, 14, students at Downey High School. He sat down recently in his office to discuss some of the problems and challenges he is facing at his new post.

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Question: I want you to be brutally honest: How well has this bank been run? You’re kind of the last best hope. The city needs to see some success. What’s the biggest problem?

Answer: Well, first of all, everything had to be built from the ground up. Policies, procedures, had to be created from zero. People have to pull together as a team. It takes time to do that. It’s not something that could be done overnight. Plus, you’re pulling people from different resources, different backgrounds, to come in and open a kind of bank that’s never been opened here before. So, if I have to be critical or direct about this, one of the things I’ll be doing is team-building. I’m just really the catalyst to put them together as a strong team to make this happen. I don’t think the Community Bank has failed. We’ve made mistakes because we’re just a little baby and we’re growing. And as we grow, we learn--and we correct our mistakes. Yes, maybe we don’t have a lot of time to grow up, but I think four years, to be honest, is not a long time.

Q: It is surprising that there were so few people here who had direct banking experience. The bank’s board, until recently, didn’t have any real banking experience. Why didn’t anyone realize this was not going to work?

Ronald D. White is an editorial writer for The Times.

A: Over time, we learned we needed more banking experience, not only at the management level, but at the board level. So, with me coming on board, and with [Lehman Bros. Senior Vice President Peter] Taylor becoming the chairman of the board this year, that will help. And we do have several openings in the board of directors. We do intend to bring additional banking experience onto the board, as well as business experience. That is our goal for the year 2000. We realized we needed that kind of experience to make better decisions.

Q: So, here you have prospective clients who are often high-risk. How is your experience with East West Bank going to help you?

A: Well, I started the commercial-lending department at East West Bank in late 1994, early 1995. So, when you talk about risky loans, it really depends on at what level, because at that time, the economy was still very bad. I had to build a commercial-lending department when California was just coming out of recession.

The key of making a loan, however risky it is, is to evaluate two things. One, to understand the business: What makes it tick? Two, how they are going to pay us back? And there is always risk involved.

The third element that the Community Bank is going to do more of is technical assistance. [Loans] are higher risk because the borrowers may not be as sophisticated about the financial aspects of their business. They are very good entrepreneurs. They may have the desire to work very hard, but they may not have the time and the knowledge and the know-how to really control their financial affairs. Our technical-assistance program, which has been very successful in 1999, has been one of my major emphases. It’s to help those borrowers, [not only] from the beginning, when they applied for the loan, but throughout that process, so that they become not only successful in their business venture, but also successful in controlling their financial affairs.

Q: What was your loan philosophy? Did you want a major deal right off the bat or did you decide to start with smaller loans?

A: Our philosophy at East West was to do both. We have to look at some larger ones to build up the portfolio. But, at the same time, we still have to go back to the fundamentals, the basics. You have to spread out the risks of a portfolio. You cannot depend only on large deals, because if one goes bad, it hurts your performance. So you’ve got to build with smaller loans.

Q: Will you and Taylor, and perhaps whoever else is brought onto the board, be expected to help generate some business, bring some prospects for loans?

A: Right. Yes. One of the things Mr. Taylor and I have talked about was to have a set of expectations for the directors--assistant directors as well as new directors coming on board--that they are to provide a certain minimum number of contacts or referrals. As Mr. Taylor has talked about, we are nonprofit, therefore, they can help us achieve our goals.

Q: What brought you to banking? Was it something you really wanted to do? Or was somebody pushing you toward it?

A: My father was a banker and he didn’t have a lot of education because of the war and everything--World War II. He had to struggle to help the family just to survive. He’s done very well in the banking industry--hard work, and self-study at night, and things like that. His bank is Wing Lung Bank. It’s a commercial bank, assets about $2 billion. When my dad started, it was a single office branch, and now it’s a fairly good-size bank in Hong Kong. I’m the oldest son, and he always emphasized that education is important. And because he was in banking, he always felt that his firstborn should be a certified public accountant.

Q: Why?

A: Because the accountant knows everything. He knows the books. So that’s how I really got interested in the business side of things, and interested in economics. I was educated in Canada and then moved to the United States about 15 years ago. I became a chartered accountant, which is equivalent to a CPA in the British system.

Q: What experiences have you had that make you a good fit for a bank with a troubled loan portfolio like the Los Angeles Community Development Bank?

A: I had been recruited to go to United Pacific Bank as a director around the time of 1991, during the national banking crisis. United Pacific Bank was also identified as a problem bank. Then the CEO resigned from the bank, and I assumed the responsibility of CEO in late 1991, early 1992. Basically, for the first 12 months, I had to just clean up things and restore the confidence of the federal regulators.

Q: When you say “clean up,” what did that mean?

A: Well, just loan portfolio problems, partly because of control issues and partly because of the economy. It’s just the nature of the business. As we take risks making loans, and the economy turns bad, some of the loans may go bad through no fault of anybody. It just happens. So I had to do that.

Q: Was there a lot of carnage there--blood on the floor in terms of writing off losses and dumping borrowers?

A: The borrowers? No, not really. Again, my goal is to try to work with the borrowers. To have blood on the floor is not going to help anything. The best way to do it is to help the borrower make a go of it. But you also sometimes have to make a difficult decision. You don’t want to put good money after bad money, knowing that you can never recover it. So sometimes, yes, you may have to make that decision. You just have to make it professionally, and hindsight, of course, is always 20-20. But at that moment, you have to make a decision with the best information you have at that moment. You may not be perfect, but, just hopefully, nine and a half times out of 10, you make the right decision. You may be wrong. So fortunately, I didn’t have to do a whole lot that was really bad.

Q: I understand this time around, you’ll try to do more co-lending with other banks and more microloans. You’ve been in the job five weeks. Do you have any examples?

A: We have just approved a co-lending agreement with Cathay Bank for a $27-million project. We’re offering $5 million. It’s a little more conservative approach: land acquisition and construction at 6th [Street] and Burlington. It will be a major shopping center, with a Rite-Aid and a Food4Less in City Councilman Mike Hernandez’s district. It’s a plan that has come to fruition. It will create jobs in the neighborhood, and grocery stores are lacking in the empowerment zone. It’s a really underserved market.

This was a bankable deal, and we were able to provide a bridge loan to make this happen. Cathay Bank didn’t want to assume all of the risk, so it’s good for Cathay, as well.

Another area is franchise financing. We will provide loans for that. These loans have a very low default rate. Every fast-food franchise has about 20 to 30 employees. It provides a career path for teenagers who can become store managers.

Q: When you look at this empowerment-zone area, do you think you have a lot to work with in terms of the strengths of some of these businesses, in terms of creating jobs? Or do you think this is going to be hard?

A: It’s not an easy job. We are narrowly defined in terms of what we can do because our mandate is to create jobs. But, at the same time, I think I have enough to work with in the area. We need to identify what is our niche. What are we trying to do?

Q: I can’t help but notice that remarkable flower arrangement. A well-wisher?

A: Those flowers over there? It came from a customer of mine that I helped build, since 1991, with a $100,000 loan at United Pacific Bank, a company by the name of WMLA. They are a garment manufacturer. They produce garments in the city of Los Angeles, just outside of Chinatown. They started out with the $100,000 loan. They are now approaching a $30-million sales company.

Q: So they sent you a good-luck gesture?

A: Yes. So I want to share that with you--my success story. And I hope to have a lot more at the Community Bank.